Publication

July 2013

“Reverse payment” or “pay-to-delay” deals between brand-name drug companies and their generic rivals may be a thing of the past given the U.S. Supreme Court’s June 17 ruling in Federal Trade Commission v. Actavis, Inc. “Reverse payment” settlement agreements, or in other words, agreements that require the patentee to pay the alleged infringer to delay entrance into the patentee’s market, will be under increasing antitrust scrutiny as a result of the court’s ruling.

“Reverse payment” agreements arose as a result of a certain provision in the Hatch-Waxman Act, specifically “Paragraph IV,” which encouraged generic drug companies to sue to invalidate patents held by brand-name rivals to enjoy a 180-day period of exclusive use (against other generics) that would likely reap several hundred million dollars in profits. Rather than in engage in lengthy, costly and protracted litigation that may result in the invalidation of its patents, drug patent owners opted to enter into “reverse payment” settlement agreements with the generics whereby the generics agreed to drop their suit and delay bringing the generic drug to market in exchange for a monetary payment.

This was precisely the type of settlement entered into between respondents Solvay Pharmaceuticals (brand-name drug manufacturer) and Actavis, Paddock and Par Pharmaceuticals (generic drug manufacturers) in Actavis. Under the terms of the settlement, Actavis agreed that it would not bring its generic to market until 65 months before Solvay’s patent expired and agreed to promote AndroGel, Solvay’s patented drug, to urologists. The other generics made similar promises.

Upon becoming aware of these settlement terms, the FTC sued the patent holder and the generics alleging that the “reverse payment” settlement agreement violated antitrust laws, among other things. The FTC alleged that the parties had colluded to share in Solvay’s monopoly profits. The district court dismissed the case and the Eleventh Circuit affirmed concluding that as long as the anticompetitive effects of settlement fall within the scope of a patent covering the drug, the settlement is legal.

The Supreme Court disagreed. In a split 5-3 decision (Justice Alito took no part in the consideration or decision of the case), the Court concluded that reverse payment settlements may sometimes violate antitrust laws even if the agreement’s anticompetitive effects fall within the scope of the patent. The Court stated that “it would be incongruous to determine antitrust legality by measuring the settlement’s anticompetitive effects solely against patent law policy, rather than measuring them against procompetitive antitrust policies as well.” Thus, the appellate court should not have dismissed the FTC’s lawsuit. While the Court’s decision opened “reverse payment” settlements to antitrust scrutiny, the Court did not state that such agreements were presumptively unlawful, as asserted by the FTC.

In a scathing dissent, Chief Justice Roberts noted that the Court’s ruling was unsupported by statute or precedent and stated that a “patent holder — when doing anything, including settling — must act within the scope of the patent. . . . If its actions are within the scope of the patent, they are not subject to antitrust scrutiny.” Thus, the Chief Justice appeared to agree strongly with the prior ruling of the Eleventh Circuit.

Indeed, as Chief Justice Roberts surmised, this ruling has the potential of discouraging settlement of patent litigation cases or, at the very least, may give patent owners and patent challengers pause before drafting and executing settlement agreements.